MARKETS

Inflation Data Takes Center Stage

Markets rallied this week on renewed risk-on sentiment. The S&P 500 reached a new record, but small caps led after a cool CPI print raised expectations for a September rate cut.

Key Takeaways

1. Headline CPI rose +0.2% in July, down from +0.3% last month, but the year-over-year rate held steady at +2.7%. Falling energy prices and flat food prices helped cool the headline number, but core inflation remained sticky.  Core CPI rose +0.3%, the fastest pace since January and up from +0.2% in June. The pickup was driven by a +0.4% rise in core services, an increase from last month’s +0.3%. Core goods rose +0.2%, in line with the prior month, with tariff affected categories such as household furnishings and apparel showing modest gains after sharp increases last month.

Implication:

Disinflation progress has slowed in recent months. Services inflation remains sticky, and while goods inflation is below target, it’s been trending higher since late 2024). The combination could make it difficult to get back to the Fed’s 2% target.

2. Later in the week, data showed that U.S. producer prices surged +0.9% in July (+3.3% y/y), the biggest monthly gain in three years and well above expectations. Services, particularly trade margins (+2.0%), led the increase, with contributions from machinery and equipment wholesaling, financial services, lodging, and freight. Core PPI, which excludes food, energy, and trade services, rose +0.6%, the fastest pace since March 2022. Inflation pressures also firmed upstream as prices for processed intermediate goods, unprocessed goods, and intermediate services rose. 

Implication:

Rising producer prices indicate inflation pressures are building upstream. If those pressures persist, CPI could accelerate in Q4.

3. The hotter-than-expected PPI report and in-line CPI report offer clues about tariff pass through. 

The trade services index in PPI, which measures wholesaling margins, accounted for most of the hot services PPI print. Wider trade margins signal rising cost pressures upstream and indicate distributors are raising prices to protect profit margins. The in-line CPI report, with a steady core goods reading, indicates companies aren’t fully passing through tariffs at this point, instead relying on promotions and non-tariffed inventories to remain competitive.

Implication:

July data indicate tariffs are being passed through, but selectively and with lags. If CPI continues to run cooler than PPI in the coming months, it will indicate that companies are absorbing tariffs, which could weigh on profit margins and stock prices.

4. The July CPI report raises the probability of a September rate cut, particularly after the weak jobs report. In late July, the market expected only 1 cut this year. Now, it expects one in September, a second in October or December, and a third in January.

Implication:

Our view remains that it will take weak labor data and/or cool inflation data for the Fed to cut. The July jobs report was the first step, but a September cut isn’t guaranteed. The August jobs and CPI data will receive a lot of attention when they are released in September.

5. The U.S. and China extended their tariff truce by 90 days, pushing the deadline to November 10th and preventing levies from reverting back to extreme levels. The extension reduces near-term inflation and supply-chain risk as retailers finish holiday stocking, and it keeps the door open to further talks and a possible Trump–Xi meeting later this year.

Implication:

It’s another pause rather than a resolution. The market gets immediate relief from the risk of higher goods prices and the risk to corporate profit margins and economic growth, but headline risk will return as the new November deadline approaches. 

At a Glance

High Beta stocks extended their outperformance, while Low Volatility and Momentum factors lagged. Cyclical sectors outperformed, led by Communication Services, Financials, and Health Care, while defensives such as Utilities, Real Estate, and Consumer Staples trailed. International stocks also traded higher, with developed markets performing in line with the S&P 500 and emerging markets underperforming. Treasury yields rose across the yield curve, weighing on long-duration Treasury bonds. Corporate credit spreads edged lower, and high yield slightly outperformed investment grade. Oil and the U.S. dollar were little changed, while gold traded lower.

Sources:

All data as of last Thursday's market close. The information herein was obtained by Market Desk Research LLC (MDR) from sources which they believe to be reliable, however, they do not guarantee its accuracy. Neither the information, nor any opinions expressed, constitute a solicitation of the purchase or sale of any securities or related instruments. MDR is not responsible for any losses incurred from any use of this information.

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